Oil drives surprise dip in UK industrial output

Reuters, Wednesday 7 Sep 2011

Poor start to the third quarter casts doubt on whether the economy can find its stride after nine months of almost zero growth and a darkening global outlook

Britain's economy made a poor start to the third quarter in July, with industrial production falling unexpectedly due to a big drop in oil and gas extraction which outweighed a modest rise in manufacturing.

The figures cast doubt on whether the economy will find its stride again after nine months of almost zero growth and a darkening international outlook that has tipped the Bank of England towards considering further monetary stimulus.

The Office for National Statistics said industrial output shrank by 0.2 per cent in July after a flat reading in June, below analysts' forecasts for another month of stagnation.

There was little reaction to the data, which confirmed economists' downbeat views on Britain's economic prospects.

"This undermines hopes that industrial production will see a decent rebound in the third quarter after plunging by 1.6 per cent in the second quarter," said Howard Archer, an economist IHS Global Insight.

The fall in output was mainly due to a 1.5 per cent drop in oil and gas production, which the ONS said was due to unusually prolonged maintenance on North Sea Oil rigs.

"Rigs are getting older so maintenance could be taking longer," an ONS statistician said.

These weaker oil and gas figures helped to offset a 0.1 per cent rise in manufacturing output, which was a shade better than economists had forecast and up from a 0.4 percent fall in June. But there were no revisions to the June data that could alter the mediocre 0.2 per cent GDP growth recorded in the second quarter.

The ONS said 7 of the 13 manufacturing sub-sectors recorded growth in July, led by electrical and optical equipment, refined fuels and food, drink and tobacco.

Nonetheless, the figures will reinforce concerns that Britain's muted economic recovery has stalled, adding to speculation the Bank of England may have to take more steps to boost growth.

Despite calls from the IMF and others for governments in major economies to rein in fiscal austerity to boost growth, UK finance minister George Osborne has shown little sign of deflecting from a path of harsh public sector cutbacks.

That puts the onus on the central bank. None of the 60 analysts in a Reuters poll expect the BoE to move interest rates when its two-day monthly meeting concludes on Thursday. However, there is growing belief on markets that the BoE may restart its asset purchase programme in the coming months.

Britain's manufacturing sector had been one of the few bright spots in the economy, benefiting from a past fall in the pound and robust demand from other countries, but for the last two months, purchasing managers' activity surveys had indicated the sector has gone into reverse.

"It's reassuring to see manufacturing just about record an increase in July on the month, in particular given that manufacturing PMIs have pointed towards contraction," said Victoria Cadman, an economist at Investec. "(But) for the GDP figures the dip in industrial production is a disappointment." 

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